What’s affordable: Benefits are affordable if employees’ contributions don’t exceed 9.5% of their household income and employers pay at least 60%.

Dilemma: Since you don’t know what 9.5% of employees’ household income is, you’re in a bind. The IRS, as promised, has created three optional affordability safe harbors. (78 F.R. 217, 1-2-13)

1. W-2, Box 1 safe harbor. The IRS floated this safe harbor in 2011, and the rules are basically the same. Under this safe harbor, benefits are considered affordable if employees’ contributions for self-only coverage for the lowest cost plan don’t exceed 9.5% of their W-2, Box 1 income.

Anti-abuse rule: You can’t make discretionary adjustments to employees’ contributions for a pay period; employees’ contri­butions must remain a consistent amount or per­centage of all W-2 wages for the year.

The safe harbor applies at the end of the year, when Box 1 wages are determined, and on an employee-by-employee basis. Your first encounter with this safe harbor will be in January 2015, for wages paid in 2014. You could also use the safe harbor at the beginning of a year by, for example, withholding 9.5% or a lower percentage from employees’ wages for each pay period.

BOX 1 = BOX 1, EXCEPT WHEN IT DOESN’T: The IRS has clarified that you use the Box 1 amount, even if that amount is reduced by pretax contributions. However, you will need to adjust the Box 1 amount for employees who don’t work full time for a whole year. To adjust, multiply Box 1 wages by a fraction, the numerator of which is the number of months benefits were offered; the denominator is the total number of months of employees’ employment. The result is compared to the share of employees’ premiums; if the premium doesn’t exceed 9.5% of this adjusted amount, you’re off the free-rider penalty hook.

2. Rate of pay safe harbor. This safe harbor isn’t a look-back method, like the W-2 safe harbor. According to the IRS, you apply it prospectively. Under this safe harbor, benefits are affordable if nonexempts’ monthly contributions for self-only coverage for the lowest cost plan are equal to or lower than 9.5% of their hourly rates of pay on the first day of the plan year, multiplied by 130. For exempts, monthly salary is multiplied by 130.

Plus: For exempts, the IRS says you may use any reasonable method for converting pay periods into monthly salary amounts.

3. Federal poverty line safe harbor. You don’t need to offer affordable benefits to employees who qualify for Medicaid, since they’re ineligible for tax credits in the first place. This safe harbor, therefore, tests whether benefits are affordable to employees with incomes equal to or greater than the federal poverty line (FPL).

Under this safe harbor, benefits are considered affordable if employees’ monthly contributions for self-only coverage for the lowest cost plan don’t exceed 9.5% of the FPL for an unmarried individual, divided by 12. This standard applies regardless of employees’ marital status. The IRS specifies that you must use the FPL of the state in which em­­ployees work.

FLOW CHART:This handy chart ­summarizes the employer play-or-pay provisions and the available safe harbor protection so you can easily tell whether the IRS will come knocking on your door for free-rider penalties.